If you haven’t considered what the competition is charging, you may not be maximizing your revenue. Spend time analyzing the market and you can influence price and improve margins. In this course, we'll show you how to implement competitive pricing and avoid common legal pitfalls of market-based pricing. You will also learn how to predict, influence and respond to competitors’ pricing moves. Led by Darden faculty and Boston Consulting Group global pricing experts, this course provides an in-depth understanding of market-based pricing and how to use it to capture more revenue.

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AH

I have added new information to me, it was an excellent course and I would like to complete another course. and I would to thank all teachers

RN

Aug 18, 2019

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The course provides real life examples, case studies. It was very helpful!

De la lección

Understanding the Playing Field

Welcome! Competitive pricing is all about setting prices based on what companies with similar products and services charge. To use this approach effectively, you have to understand the playing field. In particular, you need to know general legal parameters that guide competition in the market place. In this module, you'll get basic background knowledge so that you can use market knowledge in your pricing strategy and still stay on the right side of antitrust law. Then Thomas will join you to introduce the competitive pricing framework , which you can use to assess pricing options, anticipate your competitors' pricing strategy, and determine whether to price to competition or to elasticity.

Ronald T. Wilcox

Thomas Kohler

Transcripción

Hi, I'm Thomas Kohler with the Boston Consulting Group and I'm an expert in pricing. I talked to you today about competitive pricing frameworks and for businesses there are basically four strategies in play. There is price leadership and price follower as one pair. And there is transparent pricing and optimizing profit as another pair. What differentiates the two is the number of competitors in the market and the share that each of those competitors has. Let me walk you through two scenarios. Imagine you're operating in a market with several established players, we also call those markets oligopolies, where every player has let's say 25 to 40% share. The opposite would be a market that is fairly fragmented where you have many players and no one has more than 10% share. Now, you might imagine when this guy changes the price, it's different in the market than if he would change it in a fragmented market. So, market concentration really matters. It indicates whether you should price the competition or to add elasticity. A second scenario, it's about the relative size. If you are three, four times bigger than your next biggest competitor, you certainly have more weight and more pricing power in the market. And if you think about it the other way around, your fate depends a lot more on your biggest competitor and how well you can do on the pricing side. So relative market share matters. It indicates whether you can move the price in the industry or not. Since we at BCG like to put everything on two-by-twos, we did the same here. We have on the x-axis the relative market share of the individual player, and on the y-axis, the concentration of the top 3 players. And those axes are pretty much the way defined as the label would indicate. For the top three players, you simply take the combined market share of the three biggest players. And for the relative market share, you take your market share in relation to the largest direct competitor. Maybe a few examples will help to clarify. Here, this example, we have four competitors and ourselves. So, the market concentration was the top three, that's 35 plus 30 plus 20, so that gives us 85%. So on the graph that's roughly here. And then for the relative shares, our biggest competitor is Competitor 1. So that would be a ratio of 0.35. So here is 0.5. So 0.35, let's say, is here. That is you. And compared, the 1's biggest competitor is Competitor 2. So, here it's roughly a little bit over one, where Competitor 1 stands. Another example, this time with a lot more players. We have three bigger competitors with more than 5% market share each. We are the leader with 20%, and then there are many, let's say, 80 players who have in combination 60%. So the top three is 35%. And in the graph, that's probably roughly here. Now our biggest competitor is Competitor 1. And we have twice their size, so we are here. And Competitor 2, we are their biggest competitor, so it's 5 over 20. So it's one-fourth. So here's Competitor 2. Enough of the math, let me explain rather the precise strategies, and we start by talking about the price leadership. As the price leader, you have a lot of weight in the industry, there are not many players to begin with and you have the biggest share. Therefore, you usually try to have high list prices, and you try to be not terribly explicit and transparent about what your customers really pay. So, you have an opaque discounting, and you discount high if you need to. As a price follower you kind of have this love-hate relationship with the price leader because if the price leader prices up, you actually see there's an opportunity and you're following up. But at the same time, if he's pricing down, you probably don't have a chance to not to stay where you are because you're not strong enough in the market. So, the price followers usually price just below the leader's umbrella. They try to have this respectful distance to the price leader to avoid triggering a price war. And they're usually relatively predictable about the discounting to still attract customers. Now when you price more to elasticity at the bottom half of this framework, and the transparent pricing again, you are a relatively stronger guy, but there are many players. So what you try to be is fairly open about your pricing and you're transparent about how you set your prices and your discounts. You try to have relatively low discounts because you don't want to have this discounting better going on and you're relatively predictable. Now, in order to avoid commoditization you basically have to keep innovating. When you optimize the profit, then you're a small guy in a fragmented market, and you basically try to do all these little tricks that make you extra margin. And you hope you get unnoticed by your competitors. So, look closely at what the elasticity is and what your win rates are with your customers. You try to bundle, for example, different offerings so that it becomes a little bit unclear and less comparable what you're exactly charged for each item. And if you have a cross advantage, you can try to play the low price game. So let me summarize this for you. The access to market share data is really critical. It plays a fundamental role to tell you where you are in this framework all together, and first of all, actually what kind of market you're dealing with, whether it's more a market where you're priced to competition or where you're more priced to the elasticity of demand. You need to think about how you deaverage your market, and how you define your market. What I mean by this is imagine you are a company with three very different business units, with different set of competitors. Well then, you actually have to draw this chart three times because you're operating with three markets with different dynamics. Even within a segment you have to be thoughtful about how you define it because there could be different customer bases at play where you're actually competing in some cases or not. Think about high-end smartphones that are actually Android smartphones that are actually competing with Apple phones, or low-end Android smartphones that really have kind of a market in itself where you compete against many different smaller players. And lastly, I introduce you to this framework so that you can assess your own options, how to price in a competitive market, but also so that you can check and verify what strategies your competitors might employ. Good luck.